Francesca Stroffolini

Price cap regulation and information acquisition

Abstract In this paper we endogenize the information structure under price cap regulation. We show that, in order to induce the firm to acquire valuable but costly information, price cap mechanisms need to ensure high profits to the firm. Further, we compare incentives for information acquisition under price cap regulation and under the optimal mechanism designed to deal with the standard case where asymmetric information is assumed. We show that the latter provides higher incentives for information acquisition and that the welfare loss associated with price cap regulation — with respect to the optimal regulatory mechanism — increases when the issue of information acquisition is considered.

Price cap regulation, revenue sharing and information acquisition☆

Abstract We study the incentives of regulated firms to acquire costly information under price cap regulation. We show that revenue sharing plans, in the spirit proposed by Sappington and Weisman [Inf. Econ. Policy 8 (1996) 229], can provide greater incentives for information acquisition than pure price capping and increase social welfare.

A Normative Analysis of Local Public Utilities: Investments in Water Networks

We analyze rehabilitation investments in a regulated water industry with perfectly inelastic demand. We compare alternative organizational solutions for local provision (municipalization, corporatization and privatization), though subject to a common regulatory mechanism. We can then assess the effects of incentive regulation in public firms and find that even benvolent politicians always stick to the price-cap, in order to save on distortionary taxation. However, incentives to invest result to be excessive only in private firms, as the cost of capital is accounted differently by public and private undertakings. We also provide a theory of mixed firms, based on strategic interaction between politicians and managers, which contributes to endogenously explain partial privatization and minority participation by private stockholders. In this last case incentives to invest appear to be driven just by governance and ownership reasons.

Industrial Policy, Optimal Majorities and How These Can Prevent Capture

In a recent paper J.J. Laffont (1996) tackled the problem of constructing a positive theory of regulation by “recognizing the uncontrollable nature of the political system in a fine tuning way” and derived “simple constitutional rules which” took “simultaneously into account the inefficiencies of the political system and informational asymmetries”.